Convictions of Samsung Executives Upheld

Wednesday

May 30, 2007 at 5:47 AM

Two executives at Samsung were charged with helping the only son of its reclusive chairman inherit control of the company.

CHOE SANG-HUN

SEOUL, South Korea, May 29 — An appeals court on Tuesday upheld the conviction of two senior executives at the Samsung Group on charges that they helped the only son of its reclusive chairman, Lee Kun Hee, inherit control of Samsung, the country’s largest conglomerate.

The seven-year legal battle surrounding Mr. Lee’s 39-year-old son, Lee Jae Yong, was the most prominent among cases in which the chairmen at some of the country’s family-controlled conglomerates were accused of masterminding dubious financial deals to help their sons inherit the corporate reins.

In an intensely monitored ruling, the Seoul High Court upheld a lower court ruling from 2005 and increased penalties for the two convicted Samsung executives, Hur Tae Hak and Park Ro Bin. But it left unanswered whether the 65-year-old chairman influenced the scheme.

Mr. Hur and Mr. Park, loyal aides to Mr. Lee and chief executives at Samsung subsidiaries, each received a suspended sentence of three years in prison for illegally selling a controlling stake in Samsung Everland, the conglomerate’s holding company, to Lee Jae Yong at a discount price in 1996. Each was also fined 3 billion won ($3.2 million).

In the transaction, Everland, an unlisted company, sold Lee Jae Yong 1.25 million shares at 7,700 won a share. Thanks to that deal, the son acquired 31.9 percent of Everland, which runs the largest South Korean amusement park. His current stake stands at 25.1 percent, and he still controls the company.

Everland, which holds large stakes in big Samsung subsidiaries like Samsung Life and Samsung Electronics, is the linchpin in a chain of cross-financing among affiliates that the Lee family uses to control the entire group.

Thus the 1996 deal helped the son inherit control of Samsung, whose 59 subsidiaries and 250,000 employees generated 141 trillion won in sales last year, equivalent to almost one-fifth of South Korea’s gross domestic product. Samsung’s overseas shipments last year, valued at $70 billion, accounted for 21 percent of all South Korean exports.

“The accused knew that this deal would enable Lee Jae Yong to take over the control of Everland for just 9.6 billion won, an extremely small sum compared with the company’s total value,” the court said. “Clearly the accused have breached their official duty.”

A handful of family-controlled conglomerates, or chaebol, led South Korea’s export-driven economy in the decades after the Korean War. In recent years, accusations of foul play have dogged some of the top conglomerates as they underwent generational changes in their leaderships.

As the groups expanded rapidly through stock market listings and as the direct holdings of the so-called owner families dwindled to less than 5 percent on average, the men in control of management found it increasingly difficult to make a handover to sons and grandsons without resorting to illegal means, critics say.

In 2000, a group of 43 law professors who said they were acting in the public interest filed a lawsuit contending that Mr. Hur and Mr. Park, who were Everland executives in 1996, sold the shares to Lee Jae Yong at an unfairly low price and without getting proper approval of the company’s board. After the professors’ lawsuit, prosecutors investigated the case and indicted the two executives.

On Tuesday, the appellate court said the shares should have been sold to Lee Jae Yong for at least 14,825 won each. Everland lost at least 8.9 billion won in the transaction, it said. In the indictment in 2003, prosecutors estimated the loss at 97 billion won.

The appellate ruling also said that a board meeting in October 1996 that approved the sale was invalid because it failed to have a quorum.

Economists campaigning for transparency at big businesses called on prosecutors to expand their investigations to the chairman. His son became an executive in Samsung Electronics, the world’s largest maker of computer memory chips, in 2001.

“It is certain now that Mr. Lee Jae Yong’s illicit gaining of profit and inheritance of management control has lost social justification,” said Kim Sang Jo, an economist at Hansung University and director of Solidarity for Economic Reform. “Even if he becomes the third-generation head of Samsung, he will not be treated as a trustworthy C.E.O. by the Korean people.”

Samsung denied any involvement by the chairman. Mr. Huh and Mr. Park said in a statement that they would appeal the ruling to the Supreme Court.Lee Jae Yong was not indicted in the case. Even if the Supreme Court upholds the lower court verdicts, legal experts say, the son’s stake in Everland will not be nullified because of the statute of limitations.